Harbour Portfolio Advisors, which owns this home in Akron, Ohio, is being sued by Cincinnati, which claims the firm owes more than $360,000 in unpaid fines, fees and violation notices.Credit
Michael F. McElroy for The New York Times

In recent years, private investment firms sold foreclosed homes on high-interest installment contracts to poor Cincinnati residents who could not get traditional bank mortgages.

Now, the city is cracking down, calling those who offer such deals “predatory” actors targeting the “unsuspecting and vulnerable.”

In a sweeping lawsuit, Cincinnati took aim at one of the nation’s largest sellers of foreclosed homes, Harbour Portfolio Advisors, saying that the firm owes more than $360,000 in unpaid fines, fees and violation notices. The firm failed to properly maintain dozens of homes, the city claims, leading in one case to a child’s testing positive for lead poisoning.

Cincinnati’s move against Harbour follows a series of articles in The New York Times last year that detailed how the new market has become a money trap for many poor families. Lucy Morris, a lawyer for Harbour, declined to comment on the litigation.

The lawsuit against Harbour, which is based in Dallas, is the first of several that Cincinnati plans to file against out-of-state firms that acquired rundown homes in the wake of the housing crisis and then resold them at inflated prices without making repairs.

“We are planning more litigation,” said Jessica Powell, chief counsel in the Cincinnati Law Department. Her department has set its sights on firms with “even more egregious business practices,” she added, without naming specific companies.

In the wake of the 2008 housing crisis, opportunistic investors swooped in with hopes of profiting on tens of thousands of blighted homes across the country.

Investment firms like Harbour scooped up the run-down, foreclosed homes at bargain prices, selling them to families who could not get conventional mortgages but were desperate to own homes.

Harbour sold its homes through an arrangement similar to an installment payment plan, with a high-interest, long-term loan called a contract for deed, or land contract. But what begins as a dream of homeownership for many residents can end quickly when a payment is missed and the buyer is swiftly evicted.

Cincinnati is seeking to prevent Harbour from selling additional homes to investors until the firm remedies all the outstanding building code violations at the properties it is selling.

Harbour, city lawyers said, has been selling “substandard” homes to buyers in Cincinnati who often default on the contracts because they cannot pay for the repairs or keep up with the monthly payments.

Since the publication of the Times articles and other news reports, federal and state investigators have begun to scrutinize Harbour and other big players in the business. The Consumer Financial Protection Bureau began investigating Harbour last spring, and in February, a federal judge ordered Harbour to comply with a bureau subpoena seeking documents. And seven United States senators wrote to the consumer bureau last year to express their concern over firms like Harbour.

The lawsuit claims Harbour “intentionally fails to disclose known defects about the properties, including building code order and other violations.” Even after being warned by Cincinnati and charged with violations, Harbour went forward with sales of the properties that had incurred violations. The city documents a long list of fruitless attempts it made to get Harbour, which is led by Charles A. Vose III, to make repairs to homes and pay fines.

According to the lawsuit, Harbour’s contracts are “predatory and unconscionable” in part because the firm sells homes for up to five times the price it paid for them and holds the title to the residence until the final payment is made — which rarely happens.

When the contracts for deed fall through, Harbour “churns the property through the process anew,” often to a new prospective homeowner.

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A child who had lived in a house at 3814 St. Lawrence Avenue, which Harbour had bought from Fannie Mae for $7,600, tested positive for lead poisoning soon after the firm sold the home on a contract for deed for $40,700.

In its investigation, The Times found that Harbour had bought around 7,000 single-family homes in bulk sales from Fannie, the large government-controlled mortgage finance firm. Harbour often paid $10,000 or less for these homes. Buyers said they were surprised to find homes that lacked working plumbing, furnaces and electrical systems.

Harbour was not alone in buying cheap homes in need of major repairs and selling them through contracts for deed. Another national player, Vision Property Management, which is based in Columbia, S.C., and also operates in Cincinnati, has sold homes in rent-to-own deals that require tenants to make property repairs.

Contracts for deed have a checkered history. In the 1950s and 1960s, high-interest seller-financed deals were blamed for further impoverishing black residents living in some Chicago neighborhoods.

Not all contract sales are contentious, and some nonprofit organizations have recently tried using the arrangement as a vehicle to help get homeless families into homes.

By the late 1990s, seller-financed home deals had largely disappeared. But such arrangements have had a revival in the wake of the financial crisis of a decade ago.

Keeping tabs on the number of homes sold through contracts for deed or rent-to-own deals is difficult because the transactions are not always recorded.

Paula Boggs Muething, the Cincinnati city solicitor, whose office is overseeing the Harbour lawsuit, said other Ohio city attorneys had also expressed concern. She said she hoped the litigation would prompt legislators to pass new laws.

For investment firms, the business model can be profitable. Dan Immergluck, a professor of city and regional planning at the Georgia Institute of Technology’s College of Design, estimated in an unpublished research paper that a firm like Harbour could generate an annual return of at least 28 percent based on the way it prices homes.

Harbour, which raised more than $60 million to buy homes, last year began to sell off, to other investment firms, hundreds of houses with contracts for deed in place. Mr. Vose, whose grandfather was a banking executive in Oklahoma, appears to be moving into other areas of finance.

Investment trusts controlled by Mr. Vose and Harbour’s chief financial officer recently emerged in a bankruptcy filing as potential buyers of some of the stock in a bank holding company called Allcorp, which has a controlling interest in a small Arkansas community bank.

A version of this article appears in print on April 21, 2017, on Page B3 of the New York edition with the headline: Cincinnati Sues Seller of Foreclosed Homes, Claiming Predatory Acts. Order Reprints|Today's Paper|Subscribe